Welcome to our Line of credit equity home loan information page: This page is designed to assist you in understanding the basics of this type of loan and to give you an understanding of some of the features and downsides.
About Our services:
- Our brokers are experts in obtaining home loan approvals and specifically trained in loan structuring and credit policy, ensuring the best possible outcome for your needs.
- We provide an Australia wide service, at no cost to you.The lenders pay us a commission for the introduction of your business.
- Our website is designed to help borrowers understand the differences between loan types and the importance of having a mortgage broker to assist you in finding the right lender.
About Line of credit or Equity Home Loans:
What is a line of credit equity home loan?
Also known as a home equity loan or LOC, a line of credit is a facility that has a limit that you can draw up to and traditionally most lines of credit are structured so that you only pay interest only as a minimum repayment.
In understanding a line of credit you could think of it like a big credit card on a lower interest rate. For the purposes of this page, we will discuss a line of credit facility that is evergreen, meaning that the credit limit will not reduce over time.
These loans are traditionally higher in their interest rate than most other loans and that is because they are also one of the most flexible loans available.
With all sorts of features and bells and whistles such as unlimited repayments, interest only repayments, unlimited redraw up to the credit limit, the ability to split into several facilities and the list goes on.
We have found that a line of credit can be a very effective tool when used properly, meaning that you need to be disciplined with your money. They are also able to be used effectively in structured loan scenarios. We will not discuss those benefits here, because of the complex lending involved. Please ask your broker if you need to know more about this.
We prefer to utilise a line of credit loan in a Split Loan facility. This would generally mean that your loan will be structured so that you are not paying the highest rate by having just a line of credit loan, rather, you would have for example a line of credit and a different loan, running side by side to maximise efficiency.
It would be extremely rare for us to recommend a line of credit facility unless it is split with a better value home loan.
Should You Choose an Equity Home Loan?
You will need to decide if the benefits outweigh the downsides before applying for an equity home loan. There are risks associated with this type of loan which we will cover further on this page. Please read on to consider if a line of credit home loan would be suitable for you.
- A line of credit home loan works in the following way: you apply for a credit limit, let’s say for example $300,000. You may only owe the lender $250,000. This means that you have $50,000 available for redraw in your line of credit. As mentioned before, it is just like a big credit card that is on a cheaper home loan rate.
- You only pay interest on what you owe as a minimum payment, therefore if you were to put a lump sum into this loan, you will only be charged interest on the balance left owing on the account.
What benefits are there for you in a line of credit equity loan?
- Having the excess funds on call for lifestyle purposes means that you do not have to apply for personal loans or credit cards in order to pay for the bigger purchases that you may make over time. It would be certainly cheaper in most cases than taking out an unsecured personal loan to fund a holiday or to buy some furniture for example.
- Your minimum payment will be interest only. If you have the ability to pay your loan down substantially, then you are obviously increasing your available funds. The fact that you are paying interest only as a minimum payment means that when you have paid this loan down substantially, that your minimum payment is also reducing, in line with the debt.
- Obviously as long as you have surplus funds, then you can always redraw these funds for different purposes. These purposes can range from keeping on top of your bills, exploring investment opportunities or even purchasing a new car.
An example of this would be if your line of credit limit was $300,000 and you owe
$250,000 and you wish to purchase a vehicle.
Let’s say the vehicle price is $35,000. You would redraw this amount and buy the vehicle. This means that your credit limit is still $300,000, however you now owe $285,000 to the lender.
You will generally have a debit card attached to this account so that you can draw out funds via an ATM. This is very convenient – sometimes it is too convenient, because you are now tapping into your home loan to pay your everyday expenses and lifestyle costs. We find that this is the most common area where people lose control of this type of loan.
What do you need to be careful of in home equity loan?
- If you are not a disciplined saver, stop here – this loan is probably not for you.
- In our experience most people do not need a facility that is going to be on the highest interest rate that these lenders have. It will be much wiser to investigate if this loan is going to suit what you will be doing in the future. That is not to say that you should not have a line credit, we are just saying that it is rarely suitable to have this as your only home loan.
- Because the payment on this loan is interest only, we have often found that when we meet clients who have had one of these loans for several years, that they still owe today the same amount as when they initially obtained the loan. Of course this is a big win for the lender because they have a client who is not reducing their loan balance.
- A lifetime customer at maximum debt is just perfect for the bank.
- We would also say it is a downside to be able to access available funds from your home loan via an ATM unless you are extremely disciplined.
It is important that you speak with a professional mortgage adviser if you are considering obtaining a line of credit home loan. Once a needs analysis has been completed in regards to your individual circumstances we will be able to assess the viability of this type of home loan for you.
How can I apply?
These are your simple steps to apply for a loan.
- Contact us on the numbers above to speak to a mortgage broker, or complete our online enquiry form.
- You will speak with a broker who will take into account your needs by discussing not only your requirements, but also any concerns you have, and offer you some possible strategies and ideas that you may not have thought about.
- Once we know what you require, we will draft and email you a proposal– this will usually consist of a few options that are easy to understand.
- Once you have had a chance to look at what options are available, you can contact your broker or the broker will call you, to discuss the proposal.
- You can then decide if you wish to proceed or you may just want to discuss more options.
What are my other options?
There are many options available:
- Whether you are after a variable interest rate, a fixed interest rate, interest only loan, equity loan or any of the other loans available, it is important that you find out what is available to you before applying for a loan.
- The loans listed below are available for most lending purposes. Whether you are refinancing your home loan to a lower rate, or a property investor looking to buy that second or third property, we will have some ideas for you to consider.
- Even if you are a first home buyer purchasing a new home or renovating your existing home, there are some great deals available from the banks and lenders that we are accredited with.
- Please click on a link below to learn more about other loans that are available to you.